Wednesday, April 3, 2019
Debate on Auditor Independence
conceive on Auditor IndependenceAbstr interpretRecently of corporate break apart in the US, Australia, and elsewhere, regulatory attention has been drawn to the published of size upor interpretd non- analyse serve (NAS) and analyse lymph gland relationship. This subsidization aims to debate on listener independency by providing license regarding the relationship between non lotvas function and contri yete consulting function at a lower cost for their analyse customers.In tracking the development and identify the unwrap stages and the changes that took place in approaches to outdoor(a) examineing. The two listed companies selected for arguments ar Enron Corporation versus Chartered semiconductor Manufacturing Ltd.Enron Corporation (former Brobdingnagian board ticker symbol ENE) was an the Statesn energy compe real based in Huston, Texas. It was one of the worlds leading electricity, nature gas, paper and communications companies.1Chartered Semiconductor Manufact uring Ltd (Chartered) is one of the worlds top dedicated semiconductor instituteries in Singapore. It provides comprehensive wafer prevarication operate and technologies to semiconductor supplier and system companies.They argon taken a reference for the arguments that influenced by the changes which take a shit reported and analyses the effect. Research on non inspect service supplying impairs listener liberty, differential incentives drive take stockor behavior. macrocosmAuditor independence is a cornerstone of the auditing profession, a crucial gene in the statutory corporate reporting process and a key prerequisite for the adding of value to an audited monetary statement (Mautz and Sharaf, 1961). However, recent account scandals, involving corporations much(prenominal) as Enron in the US, HIH Insurance in Australia film cast interrogative sentence over the independence of tenders and overall value of auditing.These legislative interventions however contain occu rred despite limited and mixed empirical evidence of these proposed threats to attendee independence. Furthermore, any(prenominal) basic questions underlying this debate re main unresolved. For example, What factors influence a companys close to purchase NAS from its incumbent auditor?2The provision of NAS reduces investors judgments of auditor independence, audit calibre and the attractiveness of the fast(a) investment but not their auditor hold out alongledge or financial statement reliability judgment. This assignment ready consider two atomic number 18as of literature which relating the theories and model of auditor independence. It also relevancy on NAS found in current professional, regulatory frameworks, reviewed and summarized original metaphysical and empirical studies but have excluded commentaries and opinion.The Big Five audit tautens (Ernst Young, Arthur Anderson, Deloitte Touche, PricewaterhouseCoppers and KPMG) battery charger higher audit fees for ini tial engagement. It has prediction that where audit fees are bedevil away worldly concernly. The audit tautens lower their audit fees to accept new-fangled clients when they also provide more lucrative non audit serve. It is no actual loss of audit independence despite the loss of comprehend independence of the Big 5 unwaveringlys.The provision of NAS by audit firms for their audit clients are popular in the current grocery storeplace and continuous debate over auditor independence. NAS whitethorn include consulting service such as systems aspiration, compliancy- link up service, taxation, book-keeping or new(prenominal) service relating to the report records or financial statement of the audit client financial discipline systems design and implementation actuarial service internal audit outsourcing service management functions or human resources dealer and investment consultantThe emerged from the Enron collapse has been the extent to which audit firms are providi ng NAS to their audit clients. The fees generated by NAS have been rising more rapidly than audit fees. This has led to widespread beliefs that provision of NAS can cause the auditors to agree their independence. There are two main concerns which auditors may not stand up to management because they wish to retain the supererogatory income from NAS which is in managements gift. Second provision of service to management may lead the auditor to indentify too nearly with management and lose skepticism.The death of the paper is organized as follows Contains the background and literature review Develops the hypotheses and look for questions, Contains the conclusions.Background and Literature ReviewAuditor moldiness maintain independence in mental attitude in all calculate relating to the assignment which stated by Generally Accepted Auditing Standards (GAAS). Independence auditors furnish overcritical assurance that the financial statement have been straind by an aim, impart ial and proficient professional? (SEC 2000,p.2). It look as a risk continue sort of than an absolute and judgment about the seriousness of the threat to independence are balance against the forte of the safeguards available.Independence maintained through out-of-door constraints (e.g, ordinance and regulation) or through the profession itself which maintain the independence to preserve its market value (Kinney 1999). It appears uncertain of auditor ability to accept client insistence and emphasizing the effect of the economic interest. Its calls that consulting go as the tail that wags the tag? in the accounting industry (Investment New Article, Nov 20, 2000).The SEC announce the new overlook that the auditor independence required to disclosure the audit fee in their proxy statement, the total fees billed for work rendered by the headway accountant (the outside(a) audit firm) disaggregated into three categories as audit services, schooling technology services and all ot her services. It reveals that nearly all firm purchase non audit services from their audit firm to their audit client.Although the big 5 auditing firm continue to maintain their independence is not afflicted by these services , recently problems at Enron, WorldCom and other public firm brought accounting and auditing concerns to the attention of Congress and the public. Newly passed legislation prohibits NAS, including financial schooling services and internal auditing services (Sarbanes-Oxley Act 2002).Non audit services (NAS) are defined as all services provided by an auditor that are not considered as an audit. The Sarbanes Oxley Act (SOX) reduce the number of non audit services that an auditor are required pre-approval by the audit military commission of such extended engagement (Rouse, 2005).Most criminalise services colligate to consulting or advisory services that might establish counterpoint of interests for free auditors (Banham, 2003). The banned non audit services include1. Book-keeping or other services related to the accounting records or financial statements of the audit client. The auditor is considered not autarkical when he provides book-keeping services for audit client. It involves with an inherent mesh of interest, and auditor should examine accounting records or financial statements prepared provide.2. Internal audit outsourcing services under generally accepted auditing standards, the auditor is required to gauge the effectiveness of internal envision system over financial reporting, to create another(prenominal) example of conflict of interest. For example, Arthur Anderson provided the internal control function for Enron, before it was banned by 2000 SEC rule, and was blamed for not improving Enrons ineffective control system.3. Expert services unrelated to audit providing an in effect(p) opinion or other expert service for audit client to advocating an audit client interests in litigation, regulatory, administrative proce eding and investigation.4. Design and implementation of accounting information systems its creating inherent conflict of interest as an auditor is required to evaluate the effectiveness of accounting system in designed or implemented. instal a computerized accounting system for client was immensely popular consulting services in many big accounting firms.5. Management functions acting temporarily or permanently, as work outor, officer, employee of an audit client in put to deathing any decision making, supervisory or ongoing monitoring function for audit client.These services can provide by the incumbent audit firm or external audit firm. This research on auditor independence under these conditions identifies the chase issues. The provision NAS likely lead to a lose of actual independence and therefore lead to audit failure.Hypotheses and Research integrity of the major public concerns which emerged from the Enron collapse has been the extent to which audit firms are providin g non audit services (NAS) to their audit clients.In 1997, Enron engaged Arthur Andersen as its External Auditor. Subsequently, Enron positive Arthur Anderson as consultant also. Enron paid Andersen $52 million in 2000 in both auditing and consulting services including development of computerized financial system for conducting Enrons internal audit, but majority for consulting services. There have been many criticize about the possible difference conflict of interest faced by audit firms who received freehanded consultancy fees from their audit client (e.g. Financial time 2001a). Its expressed about how auditor with a statutory state to company shareholders can handle a commercial relationship with the companys management and remain impartial (e.g. financial Times, 2001b).Andersen leadership responded by pushing partners to become salesman, its to upsetting the delicate balancing act any auditor must perform between a client and looking out for the public investor. Peoples ha ve forgotten their significant responsibility not wholly to clients but also to investor, creditors and the public, etc.These issues by attack the specific symptoms of the audit breakdown that occurred in the Enron Case? (Gavious, 2007,pg458), Arthur Anderson whose Enron client found to have encouraged clients to use accounting techniques to mislead and deceive the market (Gavious,2007). Enron select to use a method of fair value accounting that misleading, overstated profits in the current period. These accounting techniques were employed by Enron on the advice of Arthur Anderson and it was the employment of these techniques that ultimately led to the organisations collapse (Benston, 2006) . Due to IT and other frauds which investors lost assumption in market (Crasewell, 1999).Its beliefs that provision of NAS cause the auditors to compromise their independence. Andersen has been severely criticised for significant economic and its independence has been questioned form two backs heesh of view significant economic dependence on Enron due to the society designing accounting and tax structures, and therefore it could not express an objective view on Enrons results.The two main concerns are auditor may not stand up to management because they wish to retain the additional income from NAS which is in management gift, and second the provision of a range of services to management may lead the auditor to identify too closely with management and lose skepticism. Thus, auditor independence is fundamental to public assurance in the audit process and reliability of auditor report.However, the problem facing the auditing profession is not a lack of actual independence and objectiveness rather it is the lack of confidence in financial statements. Public confidence in a companys financial statements will only be achieved by companies remaining completely separate to their audit firms (Ronen and Cherny,2002). Thereby increasing the auditors perceived independence.While Chartered engagement of KPMG as its external auditor to perform non audit services which management must consider the actual, perceived and potential impact upon the independence of external audit prior to engaging external audit to undertake any non audit services.Chartered have realized the Audit citizens charge of the Supervisory Board (Audit Committee.) to oversight of Companys financial position. Its answerable to supervising the operation of the internal risk management and control system, codes of conduct, compliance with recommendation and observation of internal and external auditor.In contrast, audit committee of Chartered have to consider whether the provision of such non audit services is compatible with maintaining the external auditors independence, by obtaining assurance and confirmation that the additional services provided by external auditor are not in conflict with the audit process.The audit committee has authority in independent audit are to be-approved wit h information sufficient to enable Audit Committee to know as follows the precisely what services it is being asked to pre-approved, know that any non audit service to be performed is a permissible non audit service make a well-reasoned assessment of the impact of the proposed service on the auditor independence.The external auditors are prohibited from providing specified non audit service contemporaneously with providing audit services to Chartered Semiconductor Manufacturing, including- bookkeeping or services related to accounting records or financial statements financial information system design and implementation internal audit outsourcing services legal services an expert service unrelated to the auditAudit committee has clarified and added kick upstairs prohibited activities for the external auditor. By focus of the importance of Audit Committee in control and supervise the activities of the external auditors. This section, Audit Committee is the plans to sustain th e independence accountants are truly independence thus and will give greater credibility to audits.In this research, Enron should have formed an audit committee to oversight the company and prevent any fraud which collapse to loser which compare with Chartered, although the audit firm provide non audit services, but they have a stronger and capability audit committee to oversight the company financial position.ConclusionIn the debate on auditor independence, the first matter that is usually raised is the provision of non audit services to audit client.To be able to perform their task of providing independence and objective assurance to shareholders, auditor must act individually. It is argued that by providing non-audit services to the audit client, the auditors independence and objectivity is impaired.In term of codes of ethics all over the world, it is not only necessary for auditors to be independence, but there is also a affect for auditors to be seen to be independent, and e ven a perception of a conflict can compromise his or her position. It behooves the auditor therefore never to get into such a situation.If one examines the research, there is little empirical evidence that proves that the provision of non audit services actually impairs independence, but one must concede that it is difficult to prove. Recent corporate failures have brought this issue very much under the spotlight again. As a profession, we should not underestimate the public feeling and the strong view held by governments on this issue.The rule of fundamentally change the way auditing profession does its business as followingFundamental shift in regulating accounting industry from the mainly self-regulated environment to public regulation approach.A new set of independence rules and regulations affects the accounting profession directly in performing audit engagement.A new independent public oversight board now has the direct authority to police audit process, auditing standards, and disciplinary measure on auditors, includingregistering public accounting firms that issue audit report for publicly(trade companies),establishing auditing, quality control, ethics, independence, and other standards relating to the zeal of audit reportsconducting inspections of registered public accounting firmsconducting investigations and disciplinary proceeding and imposing appropriate sanctions on audit firms and auditors.An independent oversight board (IOB) set up by Andersen in the US , after the Enron problems emerged but before the firm collapsed, recommended that some consulting services provided by the firm should be separated into partnerships managed independently form audit partners and without financial independence to audit clients. Recommendation was build up of internal quality control over auditing thought out the firm.Beside this its create an independent regulatory oversight agency for accounting industry. Now no truly independent agency with the authority, power or will to visit penalties against illegal. While the Public Oversight Board was a nominally independent private body that set standards for the industrys self-regulatory schemes, it was never truly independent. The finding comes from the America Institute of Certified Public Accountants.Thus, in summary I answer that since such evidence as there is indicates that there is no correlational statistics between levels of non-audit fee and audit failure, comprehensive safeguards are already applied, and stringent separation of non-audit services seems likely to increase the cost and reduce the quality of the audit, the suggestion should not be pursued. Assuming no undue overall economic dependence results from the auditor/client relationship and adequate safeguards can be implemented, we believe that companies themselves should determine whether they use auditors for non audit services, in reference book with the professions guidelines.References1. Enron profile Available at http//en.wikipedia.org/wiki/Enron2. Ashbaugh, H.,R.LaFond,and B.Mayhew.2003. Do non-auidt services compromise auditor independence? Further evidence. The Accounting Review 78 611-639.